Consumer trust isn’t something to be taken for granted, but reports from the UK, US and here at home are all pointing towards an uplift in trust levels around financial advice, which can only be a welcome development.
There are significant tailwinds behind the financial advice industry at the moment, but some major obstacles are still preventing advice practices from taking advantage of surging demand according to a new study from CFS.
New research puts paid to SMSF performance debate
There’s always been a fight between different superannuation funds – retail, industry, and SMSF – about who performs best. But determining how performance matches up between them has been difficult.
The ATO sources its data on return on assets for SMSFs from tax data, while APRA looks at rate of return based on financial statements. The measurements are therefore fundamentally different, and because of that dynamic, SMSFs have apparently consistently underperformed the industry and retail funds.
But research from academics George Mihaylov and Ralf Zurbrugg – based on financial statement information from “well in excess” of 300,000 funds, with just under half a million observations in the period between 2017 and 2019 – found that the gap isn’t that great after all.
“In reality, when we stretch all this back and look at the raw numbers and calculate a like-for-like measure… what we find is that there really isn’t a difference,” said Zurbrugg, who is associate head of research at the University of Adelaide Business School. “The performance of SMSFs is roughly the same as what you’d get from retail and industry funds.”
“My opinion is that there should be a demand from within our industry – the SMSF industry – that we do provide an ongoing rate of return measurement so that we can continue to compare something similar in terms of return performance with industry funds and retail funds, so that we can show we’re not underperforming – and that in some years, we’re overperforming.”
The researchers found that the funds most at risk of underperforming are actually those with less than $200,000 rather than the $500,000 that ASIC believes makes them “marginally profitable”. Indeed, ASIC says it is “ill-advised for AFS licenses to recommend SMSFs to potential trustees whenever their superannuation balance is less than $500,000 in assets.”
“Our results here challenge that assertion, in the sense that the performance of funds at the level of $500,000 seems rather comparable to what’s happening at $400,000, at $300,000, all the way down to $200,000,” said Mihaylov, who is a lecturer in finance at the University of Adelaide Business School.
“There is a size effect. We do want these funds to not be too small, and we definitely don’t want them to be too small chronically. But that logic runs its course at about $200,000 as far as the performance results suggest.”
Mihaylov concedes that performance cannot be solely attributed to size, and also drew attention to findings about how funds were investing. The funds that were most under-diversified, potentially holding a single asset class, showed the “greatest marginal improvement in performance” after they diversified – a benefit that “flattens out” above three asset classes. And the data paints a “complementary story” of the problems associated with being highly concentrated in cash and fixed-income securities.
“They’re the ones who experience a real decay in performance,” Mihaylov said. “No other asset class does this… This is in part a reflection of the time period we’re looking at, so going forward in a more inflationary environment with interest rates going up, this picture may not hold.”
“But no matter what environment you’re investing in, we’d never say to members and trustees that they should be putting 100 per cent of their holdings in a single asset class. I’d say that about no asset class – let alone cash, where the performance decay is the strongest.”
Mihaylov said he hopes the research “paints a robust picture” of a way to not only help funds at risk of underperformance, but also push aggregate performance for the whole population upwards.
“The majority of SMSFs are already performing up to the benchmark. It’s only this specific cohort of funds that’s dragging performance lower,” Mihaylov said. “If you’re able to improve performance for those funds than the gap between APRA funds and SMSFs likely will diminish, if not reverse.”
